In the 10 September 2009 issue, Moneylife had recommended a ‘buy’ on the HEG scrip, on 20%-25% decline (at around Rs215). The scrip was doing badly during 2010, having fallen from Rs410 in December 2009 to Rs200 now. The stock is worth considering from a medium-term perspective.
HEG is part of one of India’s leading graphite electrode manufacturers, the LNJ Bhilwara group. HEG is also present in the hydropower and sponge iron business through subsidiaries.
Graphite electrodes are used mainly in electric arc furnaces (EAF) in steel plants to melt steel scrap. Their demand is, therefore, sensitive not to steel prices but to steel production volumes through the EAF route which is increasing rapidly.
HEG has a client base spanning 25 countries. The demand for electrodes largely comes from the US, South America, China, Japan, Europe and the Middle East. HEG’s clients include companies like POSCO, ArcelorMittal, ThyssenKrupp, Nucor Corporation, Usinor, Steel Authority of India, Tata Steel and Jindal Steel and Power, among others. It is one of the lowest-cost producers of graphite electrodes.
HEG manufactures international quality, ultra high power (UHP) grade graphite electrodes. This industry is technology-intensive and involves a long gestation period for greenfield projects. So, there are only a few established manufacturers of graphite electrodes globally. HEG’s competitors include SKF India, Graphite India, AIA Engineering, Panasonic Carbon India and Rasi Electrodes. In FY09-10, the company increased the capacity of its plant in Mandideep (Madhya Pradesh) from 60,000 tonnes per annum (tpa) to 66,000tpa. The company plans to further increase the capacity to 80,000tpa at an estimated capex of Rs206 crore.
One of the major bottlenecks plaguing Indian industry has been shortage of power. HEG’s power requirement is met by three captive power plants. There are two thermal power plants in Mandideep, close to the graphite electrode manufacturing unit, with capacity of around 64MW.
The hydroelectric power plant is located in Tawa (Madhya Pradesh), with a capacity of around 13.5MW, taking the total rated power generation capacity to around 77MW. In May 2009, the company commissioned a 33-MW thermal power plant to support capacity expansion of its graphite electrodes plant and to optimise costs. For FY09-10, power revenues increased by 82% from Rs100.79 crore to Rs183.83 crore.
Bouncing back from a poor 2008-09 performance, HEG’s net profit increased 71% the next year. In the September 2010 quarter, HEG’s net profit declined to Rs29.74 crore from Rs44.24 crore. HEG’s revenue growth has been decent but operating profit has been slowing down.
During the December 2010 quarter, its sales stood at Rs310.30 crore compared to Rs290.28 crore in the corresponding quarter last fiscal but operating profit was down 25% from December 2009 when it recorded the highest-ever operating profit. In the December 2010 quarter, its net profit declined to Rs38.20 crore from Rs45.69 crore in the corresponding quarter last fiscal.
The company’s average growth in revenues over the past five quarters has been 13%. Yet, its operating profit margin is a healthy 24% and return on net worth is 23%. The stock now has a P/E of 5.36 and a dividend yield of 5.46%. Its market-cap to revenues is 0.74, while its market-cap to operating profit is just 3.29 times. Buy the stock at its current price.—
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